Stock Trading Risk Definition


Risk

The chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historial returns or average returns of a specific investment. A high standard deviation indicates a high degree of risk.


Systematic Risk

The risk inherent to the entire market or entire market segment. It ia also known as "market risk". Interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and cannot be avoided through diversification. Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific groups of securities or an individual security. Systematic risk can be mitigated only by being hedged.


Unsystematic Risk

Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through appropriate diversification. For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of a company you have shares in, is considered to be unsystematic risk.





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